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Media Spotlight: Sky acts to head off the BBC's free-to-air platform

Sky intends its Freesat offer to lead people to upgrade to pay-TV, Alasdair Reid writes. Just over a month ago, we speculated on how BSkyB was likely to respond to a deceptively cunning little manoeuvre from the BBC. The corporation had offered, with a disarmingly innocent, butter-wouldn't-melt-in-its-mouth kind of expression on its face, to set up a free-to-air satellite platform - if no-one else were interested in doing it, obviously. Or, actually, it would even do it in partnership with Sky, if Sky insisted.

Last week, we saw the response from Sky and the only real surprise was that it took so long. Sky has decided that, indeed, the time may well be right for a free-to-air satellite proposition - and, this being the case, it has also decided it will actually be best placed to launch such a proposition itself.

Freesat (not its official branding as yet) will offer unrestricted access to 116 TV channels plus a host of radio stations, provided you're willing to stump up a one-off installation payment of £150.

The line-up seems generous compared with Freeview's offering of only 26 channels, until you realise that most of the channels here are ones you've never heard of and it doesn't provide some of the interesting channels you get on Freeview, such as UK History and Sky Sports News. Nor has Sky taken the plunge and thrown in Sky One as a flagship offering, as many hoped it would. Crucially, though, the box offers interactivity and an easy upgrade route to full-on Sky subscription services.

Some form of free-to-air satellite was inevitable once everyone accepted it was likely to be the only real way to extend digital TV to the really awkward customers: those who can't afford subscription satellite and those who for various reasons can't receive Freeview (27 per cent of UK homes).

Sky, which to date has been synonymous with satellite in this country, was never going to let the BBC erode even a millimetre of its branding territory - after all, against all expectations, Freeview, the BBC's free-to-air digital terrestrial offering, is an irksome threat to Sky's growth. It was expected to find a modest role at the bottom end of the market, but it's now in around 3.5 million homes.

Unfortunately for Sky, Freesat could turn out to be a very sharp double-edged sword indeed. Some are predicting that the greatest take-up rate will be among those who have been conventional Sky Digital subscribers for a year or more and therefore have the right to cancel their subscription and keep the decoder box that Sky originally gave them for free while downgrading from pay-TV to free.

Jim McDonald, the commercial director of The Allmond Partnership, says: "Since digital's launch, Sky has shifted 11 million digital boxes, yet there are only 7.3 million digital (satellite) homes."

Consequently, some observers believe this is no more than a blocking move from Sky and we probably won't see the company pushing its new platform very hard. There won't, they argue, be a campaign in the same league as the recent one for Sky Plus.

Sky sources agree that, indeed, this may turn out to be the case, but that there is no Machiavellian motive to be read into this. The company, they point out, is primarily a pay-TV company and its resources will primarily be focused in that area.

However, they add, in no way does this indicate a lack of determination to make Freesat work. In fact, in the long term, it will become an important means to an end.

The experience of the US market shows that it took 30 years to reach a pay-TV penetration of 80 per cent of homes. We are only 15 years into that evolutionary process but, so far, the UK graph has almost exactly matched the US curve. So history is on its side and Freesat could prove to be an important staging post in the mass migration to pay-TV.

Chris Boothby, the operations director of Vizeum, says that this is a plausible argument. He adds: "Sky has seen a slowdown in the growth of subscription penetration and Freeview has shown that there's growth in the free area. My only issue is that the £150 installation fee seems too much."

Jean-Paul Edwards, the head of media futures at Manning Gottlieb OMD, argues that there will be only the smallest of implications for advertisers, unless more interesting channels can be persuaded to switch platforms.

And he argues that, in the short term, Sky now faces a strenuous test of nerve. "I believe anything that will grow the pool of digital viewers has to be good over the long term," he says. "I don't think comparisons with the US are relevant because the US doesn't have a BBC but, on the other hand, there's no reason why free satellite shouldn't be a stepping stone to pay-TV. Historically, Sky has been good at upgrading people - though it's probably true that in the short term there will be more people downgrading to Freesat."

HOW THE FREE-TO-AIR PLATFORMS COMPARE

Freeview

Cost: You can now buy a decent piece of kit for £40-£50

Households in the UK able to receive it: 73 per cent

Number of channels: 26 TV plus 21 radio

Including: All BBC (including Three, Four, News, Parliament and the two

children's channels), Sky Sports News, ITV1 and 2, two UKTV channels

Freesat

Cost: £150 installation

Households in the UK able to receive it: 98 per cent

Number of channels: 116 TV plus 81 radio

Including: All BBC, ITV1 but no ITV2, CNN but no Sky Sports News, 62

specialist channels including every home-shopping channel on the planet,